Have Merrill's Bulls Been Led to Pasture?

By LANDON THOMAS Jr.

Published: January 5, 2003

IN quick succession, just days after E. Stanley O'Neal took over as chief executive of Merrill Lynch on Dec. 2, the firm announced several executive changes. G. Kelly Martin, a member of Merrill's executive committee, stepped down as president of the international private client business to pursue other interests. Michael J. P. Marks, the chairman of its European, Middle East and African operations, retired. Paul D. Roy, the co-president of its global markets and investment banking business, said that he, too, would leave the firm.

Absorbing their portfolios were James P. Gorman, president of Merrill's brokerage network in the United States and a former McKinsey & Company executive who joined the firm in 1999, and Arshad R. Zakaria, Mr. Roy's co-president, who at 40 is now the youngest head of any big banking and securities division on Wall Street, the unit responsible for 60 percent of Merrill's profits.

It happens all the time -- a new chief executive names his own team, after all. But at Merrill, the bloodletting has actually been going on since Mr. O'Neal became president in July 2001, starting with the resignations, under pressure, of Jeffrey R. Peek, the head of asset management, and Thomas W. Davis, who had run the firm's investment banking business.

More important, it signals a cultural and management revolution unique in the firm's history. In contrast with its peers on the Street, Merrill, under Mr. O'Neal's iron grip, is ruled by the cold, hard view that the current malaise of the markets will not dissolve anytime soon.

Mr. O'Neal's Merrill, it seems, is no longer bullish on America.

Over the last two years, Mr. O'Neal's crew, which also includes Thomas H. Patrick, the executive vice chairman, has presided over the loss of 18,600 jobs at Merrill, or 25.8 percent of the work force. No other investment firm has come close to cutting so deeply.

Merrill's new management team is viewed by insiders and outsiders alike as extraordinarily numbers-oriented -- realists, to supporters; cynics, to detractors.

Mr. Zakaria's ascent, in particular, has raised eyebrows on Wall Street. He is ''a quant,'' expert at putting together complicated financial instruments, but lacking in experience in relationship banking, which generally demands more advanced people skills, investment bankers who have worked with him say.

That Mr. Zakaria is talented, there is no doubt. What matters more to Mr. O'Neal, however, is loyalty, which all in the new guard at Merrill have in spades.

The revolution will be complete in April, when David H. Komansky, the former chief executive and current chairman, departs. Mr. Komansky, with his back-slapping bonhomie, born of his years as a top-producing broker, is already a faded symbol of a global expansion strategy that resulted in the corporate bloat that Mr. O'Neal is working so hard to pare.

Inside Merrill, several employees said, morale is grim. One former employee likened the environment in the investment banking ranks to Afghanistan under the Taliban. Bankers who have left Merrill in recent years express amazement that the banking and securities business -- home to high-profile areas like mergers and acquisitions and equity underwriting -- is being run by Mr. Zakaria. He may be recognized within the firm as a tax expert and may well have made a large number of client calls last year, but he is no relationship banker, they say.

Mr. O'Neal and company -- all of whom declined to be interviewed for this article -- do have supporters who believe that they are the right managers at the right time.

''These guys are workers,'' said Stephen L. Hammerman, a former Merrill vice chairman who retired from the company last February. ''They are rolling their sleeves up and are here to do a job. They know how to deal with clients and they know how to deal with money.''

TO impose his view, Mr. O'Neal has brought in a group of people that contrasts sharply with past management teams.

Mr. Gorman, 44, is from Melbourne, Australia. Mr. Zakaria hails from Bombay. The new chief financial officer, Ahmass L. Fakahany, also 44, is from Cairo. Sergio Ermotti, 42, co-head of global equity markets, is from Lugano, Switzerland. Dow Kim, 40, the firm's head of global debt, is a native of Seoul, South Korea.

Robert C. Doll Jr., a 48-year-old American from Philadelphia, now heads asset management.

Merrill's top managers are among the youngest executives on the Street. None have been with Merrill Lynch for more than 20 years, and none have risen from within the firm's vast private client group -- Merrill's usual source for top managers. For all of them, starting with Mr. O'Neal, the idea of Mother Merrill as a nurturing bureaucratic womb is dead, according to top bankers at the firm. Mr. Zakaria is the prime example of that. His startling ascent through the Merrill management ranks and his instinctive understanding of some of the most esoteric, profitable and controversial financial products that Wall Street has to offer, combined with his uncanny ability to navigate the firm's byzantine political ways, symbolizes the new Merrill manager in many ways.